The Question That Matters
Here's a question that breaks most retail traders: Trader A wins 70% of their trades. Trader B wins 40% of their trades. Who makes more money?
Most people instinctively say Trader A. They're wrong. The answer depends entirely on how much each trader wins vs. loses per trade.
If Trader A makes $100 on wins and loses $300 on losses, they're losing money even at a 70% win rate. If Trader B makes $400 on wins and loses $100 on losses, they're printing money at a 40% win rate.
Win rate alone tells you nothing about whether a strategy works. The metric that actually matters is the R-multiple.
What R Is
R stands for risk. 1R = the dollars you've decided to risk on a trade if your stop loss gets hit.
It's not your position size. It's not the total cost of the trade. It's just the amount you lose if the stop gets hit.
Calculate it like this: (Entry Price − Stop Price) × Shares = 1R in dollars
Once you know 1R, every outcome of the trade gets measured in multiples of R. A trade that goes to your target and earns 3x your risk is a +3R trade. A trade that stops out loses -1R. A trade that you exit early at half your target is a +1.5R trade.
Worked Example
You buy MSFT at $400 with a stop at $385.
Risk per share = $400 − $385 = $15
You buy 10 shares → 1R = $150
Outcomes:
• Stops out at $385 → −$150 → −1R
• Sells at $445 → +$450 → +3R
• Sells at $415 → +$150 → +1R
Why R Lets You Compare Trades Apples-To-Apples
Imagine you take two trades. Trade A: bought 100 shares of HOOD, made $400. Trade B: bought 10 shares of NVDA, made $400. Same profit, right?
Not really. If on Trade A you risked $200 to make $400 (that's +2R), and on Trade B you risked $1,000 to make $400 (that's +0.4R), Trade A was a far better trade. You got more reward for less risk.
Dollar profits are misleading because they're tangled up with position size. R-multiples strip that away. They tell you the quality of the trade itself.
If you find that all your Bull Flag setups average +1.8R and all your Double Bottom setups average +0.3R, you've learned something massive: Bull Flags are your edge. Double Bottoms aren't. You can't see that without R tracking.
This is why your future Trading Simulator (Stage 2 of this app) will auto-track R for every paper trade. Without R data over 50+ trades, you genuinely don't know if you have an edge.
The Expectancy Equation
Once you have R data over many trades, you can calculate expectancy — the average R you make per trade.
Expectancy = (Win% × Average Win R) − (Loss% × Average Loss R)
If your expectancy is +0.3R, every trade you take is worth, on average, 0.3R in profit. Over 100 trades risking $200 per trade, that's +30R × $200 = +$6,000.
If your expectancy is −0.1R, every trade you take is, on average, losing 0.1R. Over 100 trades, that's −10R = $2,000 of losses, and you should stop trading until you fix something.
A real strategy has positive expectancy. That's the actual test of whether you have an edge.
Worked Example
Trader A: 70% win rate, +1R wins, −3R losses
= (0.70 × 1) − (0.30 × 3) = 0.7 − 0.9 = −0.2R per trade
Trader B: 40% win rate, +4R wins, −1R losses
= (0.40 × 4) − (0.60 × 1) = 1.6 − 0.6 = +1.0R per trade
Trader B wins 30% less often and makes 5x more money per trade.
How This Connects To Your Discipline Rules
Your system has a 20% buying power per position rule and a 6% total portfolio heat rule. Both of these are R-based.
Position size: if 1R = $200 and you have $10,000 in buying power, 1R is 2% of buying power. That's well within the 20% per-position rule.
Portfolio heat: if you have 3 open trades each risking 1R = $200, your total heat is $600 = 6% of $10,000. You're right at your ceiling. You shouldn't open a 4th trade until one of the open ones closes or moves to break-even.
Without R-tracking, you can't even compute portfolio heat. With R-tracking, your risk is mathematically defined at all times.